If you’re focused on paying off your mortgage, good for you. It’s generally always good to pay down debt. However, I’d also like to share with you the biggest downside to paying off your mortgage that may surprise you.
It’s been seven years since I paid off my rental property mortgage. It was a mortgage for $464,400 I took on in 2003. For the first year after paying off my mortgage, I felt great. But after that, the satisfying feeling of getting rid of debt wore off.
Perhaps the reason why the feeling was so ephemeral was because there was no congratulations card or fancy French Laundry dinner celebration. The only thing that changed was the extra ~$2,500 a month in cash flow, which went straight to savings or investing.
Before taking on this mortgage, I experienced an eerily similar feeling of ambivalence in my early 20s. After working for 60 – 70 hours a week from 1999 – 2001, while saving 100% of every bonus and 50% of each paycheck, I started thinking: what’s the point of it all?
Maybe I was experiencing a quarter life crisis back then. What I did know was that my enthusiasm for working in finance faded after the September 11, 2001 terrorist attack.
In 2003, with my lack of enthusiasm, I was *this* close to leaving San Francisco for Honolulu until I found a 2/2 condo overlooking a park in Pacific Heights for $580,000. Once I took out the $464,400 mortgage, my motivation to work hard shot through the roof!
Suddenly, my work felt more meaningful because if I stopped paying my mortgage, I’d lose my $116,000 down payment and trash my credit score. Without dependents, finally, I had something tangible to work hard for.
The Biggest Negative To Paying Off Your Mortgage
The biggest downside to paying off your mortgage is the potential loss of motivation to take risks and work as hard as you can.
Once you have paid off your mortgage, you no longer have as much fire to improve your finances. You may start slacking off in your career or entrepreneurial endeavors as well. As a result, your earnings power and net worth might suffer.
A mortgage keeps you hungry. If you are in your prime earning years and still on the path to financial independence, be careful. The natural tendency for all of us to take things easier.
Think about it. Without a mortgage, life is relatively easy. Your living costs drop down to hardly nothing. Food is abundant and cheap in this country. Meanwhile, there are a lot of cheap or free things to do for fun.
When life is easy, we tend to get soft. Not only do we get out of shape, we neglect our relationships, and ignore our finances.
When you’ve got everything covered, only the craziest of people bother to take risks. It’s irrational to work hard if you have no financial burden. When nobody is depending on you, there’s no pressure to provide.
Forget about trying to start your own business on the side or get promoted when you can just enjoy life now. The biggest downside to paying off your mortgage early may be indifference.
But when you’re older, you may regret taking things too easy when you had the most energy.
How A Mortgage Affects Behavior
Back in 2015, I made a new year’s resolution to pay off the rest of my ~$91,000 mortgage. I unleashed an inner money-making beast.
Instead of continuing to leisurely consult part-time for 15-20 hours a week at Personal Capital, I got motivated to look for more consulting work.
Due to my desire to pay off my mortgage debt that year, I ended up taking on two more consulting jobs for a total of 60 hours a week for three months. One company was a Series Seed startup out of Y Combinator. Another company was a Series B startup in the finance space as well.
All three companies were fascinating to consult for. For three months, I was making around $30,000 a month. I used all of the money to pay down mortgage principal and invested the remaining 20% in the S&P 500.
Having a mortgage made me want to boost my income. Three months of working 60 hours a week with three firms was as much as I could handle.
Took Things Down A Notch After Paying Off My Mortgage
As soon as I wrote the final mortgage check in 2015, my whole attitude changed. First, I stopped looking for more consulting work even though two out of the three contracts ended. Second, I decided to go on a 3.5 week trip to Asia to live life like a digital nomad.
I then spent several days up in Yosemite to see if bears poop in the woods. Then I went to New York City for two weeks to watch the US Open and see some friends! Once I paid off my mortgage, I began to completely slack off!
There was little motivation to try and maximize income. Why bother when the mortgage was already paid off? Back then, I was still $50,000 away from my $200,000 a year passive income target too. It didn’t matter. I wanted to relax.
Sure, not having to consult anymore meant less stress and a healthier lifestyle. But it’s not like I was stressed or unhappy working those hours in the first place.
The biggest downside to paying off your mortgage is really the loss of motivation to try new things. Only when your back is against the wall will you do everything possible to change. Having a mortgage is like an implicit back stop to not slack off.
The Hammer Came Down
If I had focused a little more on building wealth since 2015 (age 37), I probably would have been less stressed raising two kids without a job once the pandemic hit. Since both my wife don’t have jobs or subsidized healthcare, we knew our finances would be severely tested.
We just never know when the next black swan might hit. And when you have little ones depending on you, it becomes that much more important to get your finances in order. It is only through sheer luck everything has recovered so quickly.
The violent correction in March 2020 was a big wake up call to not slack off too much. For so long, it’s been easy to think we’re all investing geniuses due to the bull market.
A Recent Example Of How A Mortgage Affects Motivation
In early 2019, I bought a single family home fixer for cash. I went through a pretty arduous negotiation process that required writing a real estate love letter, a real estate breakup letter, and more.
In the end, I thought I got a great deal – maybe $100,000 – $150,000 below market price. I spent time remodeling the house to make it even better before moving in.
Then, as fate would have it, I found a really nice house a year and a half later right at the start of the pandemic in 2020. My wife thought I was nuts to buy another house so soon.
However, it was in the neighborhood. It was also the perfect house for our larger family. The combination of potentially getting a good deal and providing a nicer living arrangement was too hard to pass up.
We bought our forever home with a huge mortgage. With a new 7/1 ARM mortgage at 2.125% I was motivated to move into the new house immediately. Every day we delayed moving into our new home felt like a waste of money due to the mortgage.
Took My Time Renting Out My Old House
With our old paid off house, I took a couple weeks touching up the house in preparation to rent it out. In the past, I would have touched up the house in a couple days so it could be rented out ASAP.
Then, I passed on tenants who were willing to pay $150 a month more. They just didn’t feel right and I wanted to feel great about the tenants. I had no mortgage, so I could afford to wait.
By passing on these willing tenants, I had to wait another 7 days before finding my ideal tenants. When all was said and done, I gave up about $2,500 in rent over the course of a year.
If I had a mortgage on my rental house, I would have tried harder to find new tenants and signed with the first set of tenants. I just didn’t care as much for optimizing returns any longer.
More Reasons Not To Pay Off Your Mortgage
Here are some other reasons to not pay off your mortgage. You can say they are more negative reasons to pay off your mortgage early as well.
1) You lose your mortgage interest deduction.
The mortgage interest is treated like a business expense for rental property and a tax deduction if it’s your primary residence. The higher your tax bracket, the more valuable the interest expense.
For those in the 32% Federal tax bracket or higher, you get better value keeping your mortgage. The ideal mortgage amount is now $750,000, if you can afford it.
2) You lose a low borrowing cost.
Interest rates are at all-time lows thanks to the global pandemic. Therefore, it makes more sense to hold onto a low fixed mortgage rate for as long as possible.
In fact, thanks to high inflation, you can now get a negative real mortgage rate. A negative real mortgage rate is like getting paid to borrow money! When you are getting paid to borrow money, inflation-adjusted, you should hold onto your mortgage for as long as possible.
My current mortgage rate is at 2.125%. I won’t be focused on paying down my primary mortgage for a while. With the latest inflation figure at 6.8%, I have a negative real mortgage rate of -4.675%. Only when inflation normalizes down to about 3% will I consider paying down extra principal.
Another thing to keep in mind is whether you have a primary home mortgage rate or a rental property mortgage rate when you’ve rented out your home.
Rental property mortgage rates are usually ~50 basis points higher than a primary home mortgage rate. Therefore, if you are renting out your home with a primary home mortgage rate, you’re more incentivized to keep it.
The cash you save by not paying down your mortgage can conceivably be used to invest in other assets that provide a greater return.
3) You tie up capital in an illiquid asset.
Unless you have a very diversified net worth, having a lot of capital tied up in a property can be bad.
Your property could blow over in the next storm, or burn down in a fire. If you are underinsured, you will pay dearly as insurance companies make it difficult for you to receive full benefits from a claim.
Most Americans have a majority of their net worth (~80%) tied up in the home. When the housing market collapsed in 2007 – 2010, so did the net worths of millions.
Hence, I wouldn’t have more than 50% of your net worth in property and 25% of your net worth in your primary residence.
4) You decrease your financial returns.
If you put 20% down, a 4% appreciation on the property means a 20% cash-on-cash return thanks to leverage. For example: $100,000 down payment on a $500,000 house that appreciates by $20,000 means your equity increased by 20% to $120,000.
If you decide to pay off the other $400,000 in mortgage early, the return falls all the way down to 4%. You also don’t have $400,000 to invest elsewhere. Of course, there’s always a chance you could have invested the $400,000 in something that loses value.
5) You might start being less efficient with your time.
Instead of consulting for lots more money, I decided to spend my time discovering what it was like being an Uber driver back in 2015. After all expenses, I was only making $22-$25 an hour driving. But if I had found another consulting contract, I could have easily made 10X that amount.
If I had focused on growing Financial Samurai, perhaps I could have made much more. When it comes to making money, less debt can make you less financially disciplined.
But I decided to try out Uber driving because I was curious and fascinated with people’s stories. Some of these stories ended up on here. Further, making a lower income or close to minimum wage helped me appreciate the opportunities I have today.
If you find yourself spoiled, clueless, or taking life for granted, please work a minimum wage service job as an adult. Your dejection will clear right up!
6) A chance your credit score might take a hit.
Some of the variables that go into determining your credit score include the amount of debt you take out and paying your debt on time. Therefore, paying off your mortgage may reduce the strength in these variables.
If your credit score takes a hit, you may not be able to get the best interest rate for your next mortgage, car loan, HELOC, or personal loan. If your credit score is borderline excellent (~760) and you plan on taking out more debt in the future, perhaps paying off your mortgage is not the best move.
Conversely, if your credit score is well over 800, then paying off your mortgage won’t make a difference to your credit score.
7) You lose your negative real mortgage rate.
With inflation elevated since the pandemic began, your mortgage is likely yielding a negative real interest rate. For example, in 2022, inflation is around 8.6%. If you have a mortgage under 8.6%, which everybody does, then your mortgage interest rate is negative. This means you are getting paid to borrow money in real terms. Or it means than inflation is whittling down the cost of your debt.
When real interest rates are negative you want to hold onto your debt or accumulate more good debt. Inflation is inflating the cost of your debt for you. Therefore, you should be in no rush to pay down your mortgage in a negative real estate rate environment.
If you look at the mortgages by interest rate, 90%+ of mortgage holders have interest rates less than 5%. Therefore, pretty much everyone has a negative real interest rate mortgage today. This also means that more homeowners will be holding onto their homes for longer. Because if they sell, they will lose their low mortgage rate and have to pay up for a more expensive house with a higher mortgage rate.
A Mortgage Can Motivate Both Ways
In a curious way, a mortgage not only motivates you to build more wealth, a mortgage also motivates you to pay it down. If your property ends up appreciating in the process, then all the better!
Despite losing motivation to hustle after paying off your mortgage, paying off your mortgage early is still a worthwhile goal.
It feels great to have less debt or no debt. Every extra mortgage principal payment is progress towards more financial independence.
With a new mortgage, I’m more motivated to continue building wealth. But the reality is, I don’t need any more motivation. I have two young children that provide the greatest motivation of all.
Each child is like a mortgage itself, reminding me to not mess things up. In fact, my son the other day said the sweetest thing, “Daddy, thank you for working so hard to buy this house!” Once I heard those words, my motivation rocketed to the moon!
Mortgage And Retirement
Ideally, it’s good to have zero mortgage debt by the time you retire or no longer have a desire to make more money. The challenge is to time the outcome perfectly.
After playing around with the retirement planning calculator, I feel paying off all mortgage debt by 2031 is the ideal scenario. 10 years is a long enough time to leverage cheap debt to boost wealth. My motivation to hustle will likely fade in 10 years.
Figure out when you plan to retire and divide your debt by the number of years left you plan to work. The amount will be how much debt you have to pay down each year to reach your goal.
Let paying off your mortgage be a great motivator to boost wealth and stay focused. By the time you truly retire, I’m sure you’ll be thrilled at no longer having a mortgage.
Invest In Real Estate More Surgically
The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. It was a great way to diversify away from expensive coastal city real estate and earn more passive rental income.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. I help people get rich and live the lifestyles they want.
The The Biggest Downside To Paying Off Your Mortgage Early is a FS original post.
Having paid off my primary residence mortgage a few years ago the biggest upside is the security (or feeling of security) a paid off home provides. I will admit that when I first paid off our home and handed over large chunks of money I felt cash poor for the next year. The nest egg quickly rebounded and with all the uncertainty in the world I am very happy with the pay-off decision. Alas, I still pay property tax and insurance but no more interest to the banks. We can now survive on very little income if we had to.
Hi Sam,
Thank you for making me more aware about decrease in motivation/hunger as you become more independent.
However, what is the point to make money or become financial independent since you cannot enjoy it and feel always guilty that you relax a bit instead making more and more money (for the old age)?
You encourage people to take more credits (and be in the rat race) just to be motivated (financially)? You can become auto-motivated in various ways, but the point is to relax at certain point in time (and not at your 70s0 not to be in permanent hustle.
This is like you jump yourself in the middle of the ocean just hopping to learn to swim due to increased desperation? If you do not jump, you never learn to swim? You can die in the process man (mortgage + more risks + stress and health destroyed + so on).
I read a book Millionaire Mindset of Stanley, specifies that millionaires studied have no debt. How do they motivate to become millionaire and continue in this direction? May be GREED could be an answer. Self controlled GREED could replace the Mortgage :)
However, I noticed that you not only recommend mortgage, but refinance it. American capitalism is very pragmatic.
Good luck!
Good luck to you too! If you have found the perfect balance between motivation, enough, being happy with what you have, I’d love to near how you did it.
I really enjoy chronicling how I feel to help others who may be feeling the same way or who may not be aware about what might happen until after the fact.
Today, I’m really motivated to build wealth to take care of my kids, in addition to continue not having a job to live free.
So, right now i have 3 mortgages on 3 different properties, one being the main residence. plus 4 other properties, fully paid. I dont pay a single dime on the mortgages since they all generate rent and it all pays for itself. Until last year i was quite confortable with all this, but this year i have began to feel quite exposed, since in my latin american country there is quite a lot of economical and political turnmoil at the moment.
One of the paid properties have reached or is very near maximum market and rent value. Would you say is time to sell and payoff one of the other mortgages and leave a nice cash cushion to invest again when the time comes?
By the way, mortgages here are 10%, not 3% like in the US.
thanks for all the good advice.
I am not motivated anymore to make money, to be honest with you, but this is the point actually, to forget about money and go and admire nature and catch butterflies if this is what you want to do (and Rousseau did, actually). I feel guilt also about this and, is not ok to feel guilty.
When you do what you do in life actually, all your life you should be the sclave of making money and money?
Everything is in our head/mind, depend on what you choose in life, your freedom or to live in the most expensive city? One may choose to move to a half expensive place and be free from money, some other does not value freedom so much and prefer to live and the heart of an expensive city with the price of his financial liberty..
Sounds good. I do think the ideal retirement scenario is steady income and conservative returns so we can enjoy life and do other things.
See: https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/
hahaha I have no mortage, no home, no nothing and I feel like that, totally unmotivated. It may be true than. I don’t think a mortgage would change that at all tho
Sam,
Your comments to the ‘young guns” are spot on about not wasting their window of opportunity.
I can’t say I always agree with some of your commentary but you absolutely hit that one on the nose. I have to remind myself that I’m a bit past your point of view and I remember very clearly the world you see through your eyes.
Kudos my man. I turned 54 on Valentine’s day and I still see opportunity but have less desire to accumulate wealth but that’s another story. I wish you a blessed life and the ability to “know when” to change it up.
I found that the hardest and sometimes most frustrating part. I’m at peace with my decisions at this point in my life and I’m so glad I don’t feel the need to have to perform as I once did.
For me, it is not savvy to pay off mortgages at 2-2.5%, your overall cost is going to be 1.5% or so depending on your tax bracket; invest the extra money, net 4-6% and let your heirs sell your house and take the equity. Borrowing 1.5% fixed rate money is also a great long-term inflation edge. Paying off early is emotional; borrowing cheaply well below investment returns is more rational.
Sam, I have to respectfully disagree with you on this one. We paid off our mortgage six years ago (at age 42) and it hasn’t decreased the fire in my belly in regards to finances. In fact, it has had the opposite effect. We have so much more $$ now to invest without a mortgage payment, not to mention the piece of mind that comes along with being debt free. I would happily do it all over again!
I’m 40 and my wife and I have just decided to pay off our £90k mortgage debt by the time I’m 42. It’s going to be a frugal few years but I’m actually excited about it. I love the idea of being financially free and for me not having the mortgage debt will increase my risk taking. E.g retrain, take a job elsewhere knowing you will be fine even if it doesn’t work out etc. Bring it on!
So much truth in this. I felt burned out by my late 30’s. Somehow I have to rekindle the earlier energy and passion. Now I’m 44 and we just had a kid a couple years ago so I have to find a way to keep going. We don’t have nearly enough capital to quit working, but maybe enough capital to serve as a bridge to do more meaningful work and pull back on hours? I will take heat from my wife and her folks if I pull back too much.
I was furloughed recently but found a very attractive job offer with a startup that will pay me more money than I’ve ever made as a software engineer. I know it’s going to be a grind and I’m steeling myself for it.
What do you think of building business(es) on the side with the plan of eventually “retiring” into freelancing and/or small business? I guess that’s kind of what you did with Financial Samurai.
Meanwhile I’m plowing money into real estate and perhaps stocks (although this bubble worries me – will probably look for value managers) hoping the passive income will eventually snowball and cover expenses.
Hi Sam,
Thanks for your article. However, I think the argument is too specific.
Instead of focusing on needing a mortgage to inspire trying to make more money, I think it would be wiser to say we need a goal in our life instead. Whether that goal is to pay off our mortgage, provide for a wife and child, start a new business, fund retirement, or donate to charities you believe in is immaterial. It just needs to be a goal that requires capital you do not have today.
One point your article does not discuss that is also very important when you are out of debt is your ability to take bigger risks in life. Would you put $20000 into Bitcoin when it went down to $4000 in March 2020 if you had mortgages? The answer would be No!! However, it is completely likely you would do it if you had no debt since you would be less likely to require that money. In this case you would have made a killing financially if you did
This is timely article. I think the main reason we paid off our mortgage at the time was for the freedom. Also, there was an excitement at the time of paying more each month on the mortgage and having another financial goal.
We are now looking at building a small home that we can better age in place, on a separate piece of wooded land that we have owned for years. However, with interest rates so low now, I will not be putting all the money from the sale of my house into the new one. Instead, I will probably put 20 to 30% down and then save/invest the rest.
That great feeling of progress of paying down extra principal each time felt wonderful. Progress equals happiness, in everything we do!
Then once the mortgage is done, we feel proud of our accomplishments. And because of hedonic adaptation, we then look for a new challenge. That is the curiosity of life!
We’ve only got about a 20-year period window where we are full of enthusiasm and energy to earn and grow our wealth. If we don’t make the most of it, we might regret it later on.
If you are less than 10 years into a 30 year fixed rate mortgage should you think of the interest savings as more than the annual rate of the loan because of the way mortgage interest amortizes? Since you are earlier in the loan the percentage of interest vs principal pay down in less favorable which in theory make that years interest rate higher. (Or is this a ridiculous way to think???)
Interesting. We just paid off our HELOC or second mortgage and felt good about it. Of course, we don’t get the mortgage deduction anymore. We just use the extra cash to pay off the first mortgage now.
Hi,
I happily paid off my mortgage after 9 years (at 40 years old) and was no longer a wage slave. Within 10 years after that, I decided to semi retire and was physically and mentally in better shape than when I was working hi stress jobs full time. If that’s what you mean by being unmotivated because all my debts are paid, I recommend it highly. Stress does nothing good for people’s temperament and health. In 2021 I can’t imagine why people spend time on businesses that yield very little and think that’s the best way to go.
Thank you for your comment I agree 100% !!! Life is not only about earning more and more with high stress. Quality of life, peace of mind grant us health !!! Congratulations great move !
We bought our house outright in 2016, it felt great, no issue on motivation but then 4 years later we wanted significant ($300k cash) pre-arrival capital for an international work assignment (avoids double taxation bringing foreign capital abroad blah blah look it up if you care). Our options were to sell equities taxed as income or take a loan on our primary so we got $400k at 2.99% 30 year fixed. We’re renting our property for $6,700/mo in Walnut Creek so it’s essentially an advance on the rental income. In retrospect I should’ve taken a larger loan since the rates are great but wanted to keep it easy at $1,650 repayment/mo. This worked great for us, very happy!
Sam, why not carry a mortgage on your primary in retirement provided you COULD pay it off at any time. There’s no stress as you have the capital to repay and you got a lump sum tax free?
Howdy EB, sure, that’s what I’ve been doing for a while – holding a mortgage, but also have enough to pay it off.
But I bought new home in 2020, to take advantage of the COVID discount once lockdowns happened. Now I’ve got more mortgage debt, but it’s cheap at 2.125%.
I just updated this post on the right asset to the liability ratio or a couple retirement. Check it out. I think 5 to 1 is a good steady state ratio.
For a year I was tenaciously stalked by a serial killer. I constantly was on the move, looking over my shoulder, never at peace. I barely enjoyed eating or sleeping, and spent waking hours avoiding normal life while always feeling “hunted.”
One day the killer was caught by police , lifting the burden from my shoulders and allowing me to finally relax and concentrate on the simple daily affairs of a normal life.
A year later I’m out of shape, I’ve gained 30 lbs., and life is too predictable.
I needed that serial killer to be motivated and on top of my game.
That’s the analogy I got from the article.
But if the purpose was to motivate people like me to sign up up for your blog…..I guess you win.
Great analogy! Now imagine the serial killer had a brother who knows where you live and plans to hunt you down. Now you’ve got motivation again to get back in shape and make more money to build your defenses.
America has it relatively easy. We know this from traveling and living abroad. It’s why most of us are overweight and losing out to hungrier people around the world.
Gotta keep that motivation alive!
Great article. I started paying off some of my mortgage on my primary home when we first acquired the home 3 years ago. I soon realized paying off a mortgage with 3% interest wasn’t the best investment of my money and started using money to buy investment properties instead. The point about motivation is a great one too. I never thought about it from that perspective.
Good article on a subject I have always considered but NEVER WORRIED ABOUT. I’ll turn 60 this year and have carried debt since college through my professional career and real estate portfolio acquisition. And I never had a home mortgage until I refinanced all my commercial loans into one in 2013. At sub-4% I’ll never pay it off when I can have the interest deduction on the front end against unrealized capital gains and dividends from other investments on the back end.
Less stress and good time spent with family is a great motivator. I am so sorry for people who need high pressure to get motivated. Therapy can help to find motivation in a healthy and balanced way.
Very interesting point. On my blog, I’ve written about the financial benefits of holding onto your debt, but I haven’t considered it from this angle.
It makes sense. I’ve definitely noticed that the closer I get to financial freedom, the less motivation I have to go above and beyond at my job. It’s almost as if we need that monkey on our backs to keep us moving forward.
I have the opposite view. I just paid off my house after 8 years and 4 months and now I am extremely motivated to put as much as possible into other investments such as the stock market, my own business and rental property. I am 35 and self employed so I don’t have a pension or company 401k to rely on. Hopefully now I can really focus on putting a lot into diverse investments. I have been married for two and a half years and my wife is Brazilian and has her house still in Brazil which we are renting out. That mortgage is being paid by the renters thankfully.
Hopefully you can fully fund your Solo 401(k) or SEP IRA, whichever you decided to open up!
If you would have put all your money into investments for the last 8 years and 4 months you would have done astronomically better. In fact, if you were so focused on paying off your house, you could have sold your investments after the same 8 years and 4 months and still had a ton left over in your investments.
I agree with the author, it makes little sense to pay off a low interest mortgage (3%) when you can get a much larger return on your money in investments. Last year alone I averaged over 35% across my investments. Think about all the money you’re leaving on the table if you pay off your low interest home first. It’s all about how fast you can grow your net worth.
Hello Sam,
Great thoughts on the dilemma between paying off your mortgage early or not. I do see how the monetary pressure of a mortgage will motivate you to work harder and the opposite when it no longer exists. I will personally let mine run its 3 decade course for that reason as well as optimizing my return on investment in other ways.
I agree with you that there are a multitude of ways to get a better return on your money because of the very low mortgage rates. 2.125% on a mortgage by the way, that’s awesome man, congrats! Since the monthly mortgage payment is lower, I use my discretionary income to invest. A 2.75% annual return or higher is about as easy as it will be for a while :).
I say that now, but you never know when the next event like the dot com bubble or the financial crisis of 2007-2008 will occur again. Even in those events it is better to focus on time in the market versus timing the market even though it did take the S&P 500 nearly 7 years to recover from the near peak amount in September 1, 2000 right before the bubble popped.
Refinance Mortgage?
After reading FS for a long time I have decided to take advantage of the low interest rates and do some investments with the funds. So, after a recent move (1.5 years ago) I decided to purchase an old house tear it down and build a new one. I will finish the house in a few weeks. The house cost me $650,000 (which is a conservative estimate of the value based in the area). I cash-flowed the building of the house and are looking to get a $400,000 mortgage on it.
Based on the reviews here I have contacted Lendingtree, Quickenloans, AmeriSave, Credible and Bank of America. None of them have so far been able to give me a an actual mortgage estimate. It’s not a new house purchase (I own the property) and since there is no mortgage to refinance it doesn’t fit with their online forms I guess. For Credible I was not even able to fill in my information on their website (gave errors trying to refinance without having a current mortgage payment). I have talked to about 10 different loan-officers in the companies above (they are quick to call after you have provided the information online) but none of them have been able to give me an actual quote for the mortgage .
It is quite interesting when the whole mortgage industry going online and there are no human decision making anymore (just an computer algorithm making the decisions). So, I assume with a +790 credit score, no debt and asking for 60% of the house value in a mortgage it appears that is not acceptable for the algorithm. The only solution I have found so far is to stick with the local credit union but their interest rate (~3.5%) is not attractive. However, they have a loan officer that is empowered to make a good deal when they see one. This might be an interesting topic to do more research in for FS. How to get a mortgage when you are trying to fit a round object in a square hole.
Hi Ron,
Sorry to hear it’s been so difficult for you. After you’ve checked on over 5 platforms with 10 different lenders, unfortunately, the issue is likely you, not the lenders. There has to be something in your credit report, employment situation or background you haven’t shared yet or you just don’t know. I recommend you ask them for more detailed feedback.
That said, I’m glad you can get something at your local credit union. Although 3.5% is about 1% higher than what you may get elsewhere, it’s still pretty good.
And I do empathize with you, as getting the best mortgage refinance rate can be a BATTLE.
Here is one of my experiences: The Hardest Mortgage Refinance Ever: Key Takeaways
At the end of the day, I recognized I had to try harder to get a better rate.
Sam
Sam – I can’t resolve this article versus your one 5 months ago advocating a 0.5% withdraw rate. If you’re that dour on the long term prospects due to the low 10 year bond rate, why is debt at 2-3% good to have?
And help me with the math – who is getting a mortgage interest deduction anymore? The 2017 tax bill “double” the standard deduction while removing the exemption, and moved all SALT items into a single 10k bucket (single or joint) that all Californians exhaust in seconds.
750k x 3.33% (a lousy rate) = 25,000 in interest. The 2021 standard deduction is 25,100. And with virtually all other deductions neutered, that means nearly all married couples are no longer itemizing. Even a single filer with this max mortgage and a nice 2.5% rate is going to save just $2000 on taxes, against a mortgage cost of nearly 19k, so an 11% discount.
It’s not clear to me if the 750k limit goes back up to 1M in 2026, or has forever been reduced. But even then, my 2.625% rate means only 26,500 and the standard deduction will be at that mark in 5 years. Barring a restoration of full SALT deductions, which only sells in CA and NY, I don’t see the MID returning anytime soon. Mortgage rates would have to jump back into the 6-8% range, which you and I both agree seems extremely unlikely in the next decade.
Now given a choice of paying 4.25% again and getting a few thousand back, or paying 2.625 and getting nothing back, it’s a no brainer.
“When life is easy, we tend to get soft. Not only do we get out of shape, we neglect our relationships, and ignore our finances.
When you’ve got everything covered, only the craziest of people bother to take risks. It’s irrational to work hard if you have no financial burden. When nobody is depending on you, there’s no pressure to provide.”
I couldn’t agree more with this snippet. I can’t relate about mortgage payment, but I can relate with this one. Last year, I lacked motivation because I was “living for myself.” If I wanted, I can slack off for three months because I had savings. I didn’t take any chances of investing in properties or starting a business.
There’s a great saying, “Have kids and the money will come.” You will no longer just live for yourself once you hold your little one for the first time!
How can being debt free make one ignore relationships, unless it’s a banking relationship?
Love the perspectives and I agree. I’ve been working hard to pay off my mortgage and had the same thoughts leading up to it. I’ve officially paid off my house because of twofold: 1) the house I’m in now will become a rental down the road and this income will be used to reduce the payment on my other property and 2) I actually want to reduce expenses to focus on my online business and other higher risen opportunities. I figure if I can have a small base of stable income. Then, other income I can use to invest for upside.
The pandemic has shown an online business is definitely the way to go. Good luck! Starting FS in 2009 has been my best “career move” so far. I would be really, really miserable right now if I was still working in finance!
Not paying off my primary mortgage, only owe a small amount. I am paying off my ski condo that I have owned for 3 years with a 30 year ARM. I’m not a huge income earner, but I’m down to 20 years left after paying extra principal. Hope to have it paid off in less than 15 years. Thanks for all the wisdom!
I haven’t thought about the behavioral motivations that come with taking on an extra mortgage. Honestly, I’ve been feeling like slacking off because I am very close to reaching my financial independence number of $500,000. I’ve been losing motivation and like my job because it is a lifestyle job without a lot of stress on my shoulders.
Maybe I should look into buying a house and getting a mortgage, hopefully that will fire me up!
Have paid off my mortgage and it was sub 3 percent. Multiple reasons:
1) work in finance in nyc and volatile
2) saw prepays as part of my fixed income return
3) using cash flow starting next year to self fund college expenses instead of using 529 – instead will use them as LT tax deferred accounts and hopefully pass to eventual grandkids
4) costs to refi a mortgage in nyc are to high with recording taxes and otherwise – hate transaction costs in any form
5) can always get liquidity from a decent private banking line (7yr cheaper than mortgages currently)
My hunger has not slowed up one bit – I never was motivated by paying off my house but rather hitting a certain financial goal – that has been hit – but goals change.
I know I can retire (mid 40s) but don’t want too yet – but will consider removing the stress and considering another role in finance at another firm when time is right just to stay busy.
However, I do understand the consideration of having a low mortgage and investing it – otherwise known as a carry trade. It works until it doesn’t, and be honest with your own investment risks and what happens in the tail risk that super safe investment doesn’t turn out that way?
Good reasons! And so long as you feel good about your decision, that’s what matters the most.
It’s hard for me to put aggressive new money to work in the stock market at currently valuations. So now, I’m evaluable between commercial real estate deals and paying off mortgage debt. Investing in stocks is a tertiary consideration, unless there’s a 5-10% sell-off.
I always have RE I evaluate, but always via 3rd party managers. Have used B-REIT and Invitation Homes as the basis of my core RE. I don’t have the time to manage my own properties so find it easier to outsource to the best.
Keep up the good work, I always read your stuff and we have similar perspectives.
Interesting way to look at this, Sam. I’ve been on both sides of the spectrum at different times in my life.
This year we ended up selling off a rental property with a lot of equity and using the proceeds to pay off a couple of other rentals. There was enough to pay off our primary home mortgage, but we decided to just refi it instead at these ridiculously low rates.
We’re using the extra cash flow to accelerate the paydown of the primary mortgage now… at least until there’s something better to do with the cash.
Happy New Year to you and the family!
Sounds like some shrewd moves! HNY!
Hi Sam. I have enjoyed your blog over the years. Is a paid off mortgage the reason for a drop in motivation or is it a lack of purpose or goal in life? I think the latter of which a mortgage could contribute to some purpose in one’s life.
It’s up to everyone to decide that question for themselves.
In 2015, after hustling hard with three consulting gigs for three months, I was beat. After paying off my mortgage, I decided to really unwind.
Today, having a mortgage helps me keep an eye on my finances. I also have a goal of generating an incremental $10,000 a month in 2021 to cover my mortgage and healthcare expenses.
I know I will achieve my online income goal thanks to having a mortgage payment. It feels great to provide for my children. Otherwise, I’m really not that motivated to work on biz dev deals to earn money online b/c that takes work.
How about you? What is your motivation and purpose in life?
Your best advice for me
For many, including me, 2020 was fantastic. I know it wasn’t all brains. I had no idea what Tesla would do. I bought it because of Elon and clean air. Not because I knew what the stock would do.
This is the point. I have wanted a particular watch for 10 years. I sold some shares of stock, not Tesla, and bought it.
You advised taking some “funny money” and converting it to something tangible. That is what I did. I never would have done that w/o your suggestion. Now, I have this great watch. There is one other thing I want. My motivation is to buy it when I feel I can afford it.
You’ve made some good points Sam, the “all debt is evil” folks will scream and holler and the “only those who retire early are worth anything” folks will jump up and down but there ARE situations where keeping a mortgage isn’t the dumbest thing you can do, you mentioned several examples.
It’s one thing to say “all debt is bad” and another thing to be HONEST about human psychology and take advantage of it (something marketers and others try to do to all of us all day, every day).
Your example of keeping a mortgage to keep you hungry is a good example of “hacking” how humans work, folks might not like it, they might not agree with it but, you can think it’s dumb AND acknowledge that it “works”.
I LOVED the idea of being debt free but, on the path to that, like you, realized I would wake up the day after I was 100% debt free the SAME person, with not much of a difference in the world. (I’m a lucky man as I do have 57K in mil pension so I can rest easy since we have simple tastes, low spending, lots of reserves). Once I came to terms with the fact that being debt free might not be the best financial choice, controlled my emotions around the idea, reviewed all our numbers a couple (15-18) times, we decided to refi our home and take cash out to put into the market.
It’s ok to LOVE the idea of something (being debt free) and if you don’t have solid passive income or a pension, it DOES reduce risks, but loving something and recognizing that it might not be the best, in my mind, that is next level thinking. Then hacking your life so you take advantage of that (you want to be debt free but realize you could do better by investing money you take out of home equity) and “working out” the cognitive dissonance between the concepts (if there is any), that is NEXT level thinking.
Keep up the good work Sam
Thanks. Are there really people who think so one dimensionally? There’s an ebb & flow to finance.
““all debt is evil” folks will scream and holler and the “only those who retire early are worth anything””
Taking on debt to live it up feels good, within reason. Paying off debt also feels great. In such a low interest rate environment, it is logical that the desire to pay down debt slows and the desire to invest grows.
“Are there really people who think so one dimensionally? There’s an ebb & flow to finance.”
Sadly, I was born in an area populated with such people, short sighted, mostly in debt/lower income, and unwilling to open their aperture. Once an idea like “all debt is evil” takes hold, they run hard with it. The same is true for “everyone must have a huge truck” or “it’s ok to make payments if you can afford it” (I know, opposite ideals but trying to demonstrate that they don’t think past the first “thought”).
I was mulling this over a little more and rather than a single metric guiding our debt decisions, I think a more nuanced model is appropriate. Something like:
Balancing debt load with:
– Positive net worth
– Income potential/history
– Phase of work life and phase of occupation
– Age, family situation
– Level of passive income
– Purpose of debt
– Current economic situation (big picture)
– Current emergency fund size (can you service the debt easily)
At some point, I guess the networth grows to the point that debt is no longer desire-able? I don’t know what the level is but suspect is many millions, in the meantime, we can make more informed decisions about our finances by reviewing the whole picture, not just a “yes/no” decision tree…
Makes sense on those bullet points. I think we all review many of them implicitly over time.
As for trucks, so long as the owners are mostly using them for work, like my general contractor or gardeners/landscapers, then trucks make a lot of sense.
But I do have a 30-year-old neighbor who still lives at home with his mama. And he bought a massive double cabin truck. I asked him if he is now working in construction, and he said no. He bought it to take his surfboards.
“But I do have a 30-year-old neighbor who still lives at home with his mama. And he bought a massive double cabin truck. I asked him if he is now working in construction, and he said no. He bought it to take his surfboards.”
Such a strange trade-off to value a truck to haul surfboards more than the freedom of living on your own, even if it’s a tent somewhere… some lines of thinking, I just can’t come to terms with.
It’s hard to be independent for some when parents continue to provide well into adulthood.
I’m living it!
Have a 20 year old who is at home due to school shut-downs, works HARD but still doesn’t have to live like a broke college student because mom and dad are paying for college (with 25% payback expected) and covering the bills, which means discretionary income = money to blow! It’s a tough spot and we are about to institute rent payments even though they are “in school”….
This is a hard situation, not clear cut like “if you go to school, you can stay here for free until you graduate”. Figuring that out when “going to school” means class from home… a whole new dynamic.
How are you going to manage when the kids are older, considering you’ll likely be much wealthier at that time?
Your 20-year-old still has a pass! I would think if he’s still living at home after 25 or 26, then you might have to start getting worried.
As for me, I’m putting my kids to work early, for their own sake. My hope is that they will understand business and wok ethic by the time they turn 18. Let’s see!
I paid off my mortgage many years back on my rental as well as primary home. Now when I see APRs around 2.5% on 30 yr loans, I kick myself why I paid off my mortgage.
I am thinking of taking a loan on primary home and invest in one of Vanguard Funds that return 5+%.
I like to hear what you think about this.
I appreciate your recommendations.
I totally agree with you, Sam. We paid off our mortgage back in 2009. Without that monthly mortgage obligation, I felt that we lost that “WHY” to working. We just lost our drive to move up in our careers. A few months ago, we decided to have a second home near a ski resort. We will close on that second home this March and I feel having a mortgage once again will ignite that desire to keep working. We are in a comfortable situation and could technically retire if we wanted to (a paid-off home worth $600K, $2M of equity in 9 rental properties, and $3.6M in stock/mutual fund investments). Our combined income is $700K and I’m not quite ready to walk away from that (my husband initially wanted to retire in 2023). So, I’m hoping that having that new mortgage will motivate us to work until 2026 (3 years longer than original plan and the year our 2nd child will finish college). I will be 56 and my husband will be 61 at that point.
Very cool. What is it that you guys do? If you enjoy your work, might as well keep making that $700K!
Working until kids graduate from college I’d always a nice and satisfying goal.
Hi Sam. Work is satisfying enough for me. I personally like the feeling of having professional achievements, plus the pay isn’t bad at all. I get 8 weeks of vacation and make $200K as a corporate financial controller. Job isn’t stressful at all. My husband works in a Fortune 500 company as a VP of Sales making about $500K. His job is a pretty stressful and that’s why he wants to quit in 2 years when our older son finishes college. I’ve been encouraging him to stick it out ad additional 3 years just until the 2nd one finishes college. I’m hoping having that mortgage for our 2nd home will burn that fire again to hustle.
Very interesting article and got me looking back the last decade. My husband and I paid down our primary home mortgage a couple of years before the financial crisis. We both got laid off during the crisis and counted ourselves so very fortunate not to be carrying a mortgage and stressing the finances which is said to be one of the biggest the instigators of marital discord. I didn’t lose motivation to work but I think I need stay in a lesser paying position longer (I quickly found another position) because I didn’t have a mortgage to push me toward maximizing my earnings potential. So I might have looked for a more lucrative position sooner. Maybe, or maybe not.
Both you and your husband getting laid off during the recession definitely is a scary moment. Glad you guys got through it.
My firm went through seven rounds of layoffs over two or three years. It was pretty nerve-racking. And, I had taken out a massive mortgage in 2005.
I was the best employee I could be during the crisis!
I work in a cyclical industry and the best in our workforce is found in the depth of a crisis.
Hi Sam,
Timely post for me. I currently am about at the halfway point of my 15yr mortgage but am in the process of trying to refi to 30yr because I want the extra cashflow. Am I crazy??
Thought process is I would like to move and rent my primary out. I have enough saved for a 20% down payment without selling. House is worth atleast 600k and have about 200k left on mortgage and my wife and I have no other debt. Both in mid our mid 30s with 3 kids and we need an upgrade.
Hope I’m making the right move as it goes against the grain of my traditionally conservative approach.
There is a clause where you’re supposedly not supposed to rent out your primary residence within 12 months after refinancing. But the clause is hard to enforce and I’ve never heard of a bank in forcing it before. Just giving you a heads up. It’s smart to refinance your primary home mortgage because it will have a lower rate than a rental property mortgage refinance.
Poignant article, Sam. After trading up the residence this Fall, I find myself with a much larger total mortgage liability. Don’t get me wrong, we bought our dream home and love it. But I went from smooth sailing and never giving a second thought to my monthly mortgage to planning and debt pay down calculation overdrive!
I have four properties (3 SFH rentals and my primary). In total, my mortgage exposure is now 627k. 75% of the debt is 30 year 2.5%. 25% is at 3.25% 30 year fixed. I feel I’m well positioned with capital and diversified income streams and savings. But… assuming this additional debt has definitely lit a fire under me to start building my online presence and marketing for my day job.
Sounds good! I hope you make more money thanks to your mortgage.
It’s really a great combination to make more money, have a cheap mortgage, and build equity through debt pay down and natural appreciation. It’s really hard to lose over a ten-year period.
Interesting, I hadn’t thought about the mortgage as it relates to the motivation. I could see that being true for me. At this point in my life, my oldest kid is headed to college next school year. So I have high motivation and focus right now. Nothing focuses the mind like having a family depending on you!
But I have to say, just this week I finally closed on re-financing my mortgage for my primary home plus two rentals. I have cash sitting here whereby I could pay off the primary home mortgage. But why? I actually extended it out and locked in a 15year fixed at 2.5%. Maybe could’ve even done better than 2.5% but I locked that rate in months ago.
Even though I can payoff my mortgage(s) I’m opting to carry the notes at low rates while actively investing cash elsewhere. And it might provide a nice inflation hedge in addition.
Yes, it is tough to actively pay down a 2.5% mortgage. This is partially the reason why risk assets were doing so well. The opportunity cost is so low.
Working to make money for the next four years until your kid graduates from college is a good goal.
Hey Sam,
First time reader here. I disagree with your assertion that one should pay off their mortgage before they retire. All the reasons you state for having a mortgage are good reasons to maintain one while in retirement as well. That will keep one focused on maintaining their investments to ensure that they generate sufficient cash flow to keep their retirement lifestyle.
Best regards,
Rob G
Sounds good to me. You’ve got to do what’s best for you.
Once I retired from a day job, I was first motivated not to see a decline in my net worth in the initial years. But now, 8 years later, i’m not too worried because it’s been such a huge bull market for so long.
But my own kids to keep me motivated.
I’m currently in this situation. My wife and I built our dream home on a nice plot of land and have been paying down the mortgage like mad. We should have it paid off within the next month or two. With the land and house we had $520k all-in. We’ll have the mortgage paid off in 18 months.
We were both doing extra jobs to bring in more; just like your article says :-) We do have investment plans with the extra cash flow that it will bring. I do concede we may get soft or not hungry enough. We shall see.
When the mortgage is paid off, let me know six months after how your hunger is!
You are so right. My motivation tanked. I wanted to pay off the mortgage. I have had two heart attacks. If I have a third, I know my wife is fine. We have no debt.
Yes, we work hard with a family, but as we get older we must think of our spouses. That is my motivation.
I also believe I must share with my wife how are investment accounts work. To leave her with millions in investments and not have her know how to buy or sell a stock is wrong.
We talk about making money as if it is a singular endeavor. If we are married, we must bring our spouses into the process. With the virus, none of us can promise our spouses we won’t die.
I’m sure many of your readers have money. Many of us may be sophisticated investors. Our spouses can’t handle that when we are gone.
I need to explain why I buy Tesla. How much money I have made and how I could lose it all. What to do when the portfolio is down 40 percent. Taxes, etc.
As you get older and a responsible spouse, you will be motivated with or without a mortgage.
I am seriously considering paying off my home in the spring. I have been paying down the mortgage for the last 3 years. I am 9 years into a 30 year fixed 500k mortgage with 200k left to pay off. I am the sole breadwinner of a family of 4 in a relatively high stress NYC financial services job that pays well but not investment banking / trading well. I live in the suburbs. I recognize the math of keeping the mortgage and investing instead but feel my personal situation and sanity depend on being debt free sooner than later. I am concerned that having a mortgage hanging over my head will limit my freedom to control my time as I get older (currently late 40s) and could force me to take a job I do not want if something happened to my current job. I do not have other passive sources of income. Ultimately a few years from now I would like to pursue more entrepreneurial avenues and have the flexibility to earn less and spend more time with my family and help 2 sets of aging parents. How would you balance the math vs personal situation in the mortgage payoff decision?
What’s your income? Sounds like it’s at least $100,000, which makes having a $200,000 mortgage remaining very affordable.
If you are already feeling potential concerns about the future, then I would think your desire for liquidity may be more important.
Not feeling concerns about employment stability but more about the amount of time / travel involved in the job and level of stress and how that impacts overall daily life. Current annual comp 350-400k. In terms of assets – 1.5 million in IRA/401k, 50k in taxable brokerage acts, 250k in cash in anticipation of paying off house. No other debt besides the mortgage. Home is worth $750k. Married with two kids in middle school
$400,000 income should be more than sufficient to pay down your mortgage in two or three years.
I just don’t know if you’ll feel that much more secure. $750,000 home is a large percentage of your net worth.
I would pay it down like crazy JJ. My husband is 55, he owned his own business for 30 years and just sold it. We paid off our mortgage and it feels really good. He wants to focus on our teenage girls and work WAY WAY less….like not at all. So we felt having no mortgage provided us restful sleep at night. There is such a peaceful freedom from not having that hanging over our heads. But to Sam’s point, we had money left over from the sale to invest like crazy in other things. I’m sorry but the whole idea of “well you can get more than 4% in the market” just doesn’t outweigh the ease of mind.
However now, the mortgage rates are around 2.5%. So the hurdle to outperform is even lower.
But peace of mind is priceless!
Christine. – I really appreciate your perspective and feel that most people don’t understand how a really stressful job pulls you away from being present with your family.
I’ve been in the same situation as this. Completely debt free after paying off mortgage, the house wasn’t what we’d call perfect but certainly good enough to see us into our old age. Fast forward 3 yrs down the track, decided to demolish and build our dream home, now back into mortgage again. The feeling for those first three years was great, it allowed me to think outside the box of constantly focusing on reducing the mortgage. Once mortgage free and with much better cash flow, I studied and intensely self educated on financial matters and now have a good portfolio of stocks and have a much better understanding on investing. On a side note, I prefer stocks to property as I feel already highly house / property biased with the home. We are now very happy to live in this home forever. I understand there is some loss of hunger going debt free but I developed different hunger for passive investing etc. The mortgage ties your mind down and dulls it, I find. To be creative and start a new business, debt is a burden on the psyche. So I respectfully disagree with you on this one, Sam!
Motivation to grow the nest egg is enough to keep me from getting soft.
Peace of mind from being mortgage free is a priceless bonus!
The new HELOC law that says you can’t write off interest unless used for substantial improvement to your home is very vague.
I just refinanced my $50K heloc into my existing mortgage.. then cashed out another $50K. The original $50K heloc I have all the receipts for new roof, new HVAC, new pool ect. The $50K I cashed out last year was originally meant to remodel our kitchen and bath. Then pandemic fear spurred us to save the money for the time being. I can’t find any time frame for when the IRS determines I have to use that cash for a “major home improvement”. Can i wait a week, a month.. 5 years!?
I’d imagine it’s safest to not deduct the interest on that $50K this year.. but if I remodel the bathroom next year.. can I deduct it then? It’s all so confusing and poorly written. Even tax specialist don’t really know.